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May 1, 2008

ASLEEP AT THE WHEEL

Congress snoozes while China continues to manipulate its currency.

Pronounce it dead, for this year at least. Potential federal legislation to force China to stop playing cute with its currency formally expired March 27, a victim of lobbyist influence, a failure of courage and a stupor of indifference in the House Ways and Means Committee. March 27 was the day Ways and Means Chairman Charles Rangel (D–New York) and more than a dozen of his committee members wrote a letter to the White House asking for help from the nation’s leading protector of China just the way it is, manipulated currency and all.

It would be hilarious if it weren’t so pathetic. After all, the president of the United States has made it quite clear that he intends to do nothing of note about China’s artificially cheap currency, cheap goods and cheap version of trade law. He has said, in fact, that if Congress chooses to pass legislation tightening the rules on currency manipulation, he will veto it, preferring to stick to his administration’s well-established strategy for dealing with China: begging and pleading.

Rangel’s letter urged the White House to pull itself together, using rhetoric such as “alarming” and “staggering” to describe China’s currency and trade abuses and their impact on the United States and global economies. It called on the president “to adopt and implement a new strategy for dealing with China’s persistent currency manipulation and other trade issues … to use all available tools at its disposal to address China’s protracted, large-scale intervention in the foreign exchange markets to maintain an undervalued currency.”

A spokesman for Rep. Duncan Hunter (R-California), co-sponsor of the proposed Ryan-Hunter Currency Reform for Fair Trade Act, now sitting in Ways and Means, calls the Rangel White House letter “a cop out.” A spokesman at Ways and Means was a bit more sheepish. “The letter says Congress will take action if necessary,” he says.

Stalled Legislation

Certainly Ways and Means has tough, thoughtful, well–targeted legislation before it that would take China on, and by the accounts of many in Congress and activist trade groups, if that legislation reached the floor of the House, it would pass. There is little doubt in anyone’s mind that if Rangel were so disposed, he could move legislation to the floor. Instead, he decided to write a letter to the president. In Congressional circles and elsewhere, this is called “throwing in the towel.”

Bills that would declare currency manipulation to be the equivalent of an illegal trade subsidy subject to countervailing duties and other trade sanctions—notably Ryan-Hunter in the House—and that would strengthen the definition of currency manipulation—the Dodd-Shelby Currency Reform and Financial Markets Act in the Senate—are sitting, waiting, languishing. Choose your term.

“This is very disappointing,” says Lloyd Wood, director of membership and media outreach for the American Manufacturing Trade Action Coalition (AMTAC), a Washington, D.C.-based lobbyist organization founded by a group of domestic manufacturers that works to establish trade policy to protect manufacturing jobs. “If you had told me even six months ago that we would not have China currency trade legislation out of at least the House by now, I would have said you were crazy. With all the strong public statements, I thought things were moving forward in the Democrat-controlled Congress.”

Wood has reason to be disappointed. There has been plenty of tough talk—strong enough that Wood, along with lobbyists and officials representing metals and a wide range of other manufacturers, can be forgiven for thinking they would get the legislation they were looking for.

The smart money even a year ago was on the Ryan-Hunter measure (HR 2942), sponsored by Hunter and Rep. Timothy Ryan (D-Ohio), followed by proposed legislation from the Senate Banking Committee, chaired by Sen. Chris Dodd (D-Connecticut), and a measure from Senate Finance Committee Chairman Max Baucus (D-Montana). All are likely headed to a House-Senate conference committee to be mashed up and resolved in some form.

At that time, the Ways and Means Subcommittee on Trade, chaired by Rep. Sander Levin (D-Michigan), was holding well-publicized hearings, with Levin and Rangel thundering about how the loss of U.S. manufacturing jobs and flood of cheap, if not shoddy, Chinese goods had to stop. Levin, who also signed the White House letter, declared last May, “The administration has had a failed policy on currency.” He opined that the hearings “accelerated work on legislation.” Levin was echoed by no less than Speaker Nancy Pelosi (D-California), who promised that Congress could soon move forward with legislation to “address the growing imbalance in trade with China, strengthen overall enforcement of U.S. trade agreements and U.S. trade laws, as well as overhaul and improve support to ensure that American workers and firms remain the most competitive in the world.”

Lawmakers mainly from manufacturing states have been saying for several years that China’s artificially cheap currency, plus its tax breaks and other subsidies to its industries, were an important factor in the decline in U.S. durable goods manufacturing output and jobs. Ryan and others trying to force Congressional action have estimated that this government support allows China to price its exports, from steel products to toys, at up to 40% less than would be possible without government help. Throughout this often-ferocious debate, the arguments generally have never been about the extent or purpose of China’s subsidies and currency manipulation. Those were conceded, although estimates of a fair valuation for the yuan varied widely.

No Call to Action

The debate has focused rather on what, if anything, to do about it. Trade hawks such as Ryan argued for targeted duties on Chinese goods. The Bush administration and U.S. corporations that thrive on selling low-priced Chinese products prefer negotiations or simply allowing inflation and what they see as natural cycles in China’s economy to take care of the problem.

The administration, by its own admission, has the power to declare China a currency manipulator in violation of international trade law and impose countermeasures including retaliatory tariffs. But it has repeatedly refused to do so.

The Ryan-Hunter measure, thus, became the focus of activist sentiment at last year’s House Ways and Means Committee hearings. The American Iron and Steel Institute (AISI) told that hearing, “The United States can no longer afford to sit back and allow China to continue—because of currency undervaluation alone—to apply a 40% subsidy on all of its exports and a 40% tax on all of its imports. … There are times when our government must ‘intervene’ to defend and restore market forces. … [This] is essential if we are to have any semblance of rules-based trade and a level playing field that will enable efficient U.S. companies to win out in the marketplace.”

Last August, when Dodd’s Senate Committee on Banking, Housing and Urban Affairs passed the Currency Reform and Financial Markets Act of 2007, he too said a change in the current currency manipulation policy was long overdue. Richard C. Shelby (R-Alabama), the ranking member of that committee, added, “For too long, American workers and businesses have suffered because China manipulates its currency to gain an unfair trade advantage.”

Then, Senate Finance Committee Chairman Baucus persuaded several of committee members and colleagues to endorse a bill similar to Dodd’s. Two additional significant sponsors: Sen. Hillary Clinton (D–New York) and Sen. Barack Obama (D-Illinois).

With two powerful committees issuing two different bills, Dodd and Baucus now say they are “working together” to decide who is in charge of this issue. Need we say, “no one?” At this point, backed by a battalion of powerful lobbyists representing retailers and importers who like cheap Chinese stuff, faced by an economy quivering with uncertainty, and preoccupied with new regulation for Wall Street and banks, it would take divine intervention to turn Rangel et al. back toward China.

Pressure Points

That may bring us to the Dalai Lama, the exiled leader of Tibet’s Buddhists. The Dalai Lama, the Tibetan people and “Free Tibet” demonstrations across China and at its embassies around the world that began earlier this year have been shining a fresh, albeit gloomy, light on Chinese political repression. The Chinese government has taken to calling the Dalai Lama a “jackal,” not an effective way to win friends and influence people outside the country.

Much more controversy will likely follow as this August’s Olympic games approach, and not just because of China’s suppression of Tibet. The Chinese government sells weapons to the Sudanese government, which uses them to arm its soldiers in the ethnic/tribal war in Sudan’s Darfur region.

A tsunami of ill will toward China might be just the thing to turn Congressional attention back to Beijing, the artificially depressed yuan and the trade debacle it has financed, some believe.

One school of thought among Congressional observers, however, is that little will happen on trade until someone is elected president. On the campaign trail, at times there has been—what else?—strong talk. Republican candidate John McCain, an outspoken free trader, steers clear of any policy that interferes with his “leave ‘em be” stance. “Embracing protectionism here to retaliate for it elsewhere is akin to a murder-suicide pact, and we should resist the temptation, whether the product in question is bananas or sugar or steel,” he says on his campaign Web site.

Clinton and Obama, at various points in the campaign, have both talked a fairly good game on China trade issues. In Pennsylvania, hard hit by the loss of manufacturing jobs, both said in pre-primary speeches they would move against China’s unfair trade practices. “China’s steel comes here, and our jobs go there,” Clinton said, outlining several steps she “would consider” as president, including a ban on the federal government buying China’s undervalued goods and increased tariffs on those same goods. Obama, for his part, said he would “use all the diplomatic avenues available” to get China to stop manipulating its currency.

Last June, after the United States declined again to classify China officially as a currency manipulator, which would have opened it to trade sanctions, Obama wrote Treasury Secretary Henry Paulson: “China has manipulated its currency for years in order to gain an unfair advantage over the United States in trade.” He promised to “… work with colleagues in the Congress to force action and strengthen the ability of Americans losing out from Chinese currency manipulation to bring forward complaints for remedy through increased duties on Chinese goods.”

Clinton, in March, called Bush “a president who has turned back the clock on worker and environmental protections, allowed our trade deficit to skyrocket and stood idly by while countries like China unfairly manipulate their currency and dump products like steel on the U.S. market.”

The trouble is that campaign rhetoric is rarely worth the paper it’s written on. So it is even more important to try to understand why China has essentially been given a free ride in spite of its currency and trade policies.

To add to the puzzlement over this legislative stalemate, many veteran election and Congress watchers believe that trade and currency issues, when linked to the decline of the economy, jobs and manufacturing, can be a powerful political issue. Voters put a number of freshmen in the House and Senate in the last election based not insignificantly on their trade positions.

No Easy Answers

For lawmakers, the election itself stands as a barrier to action on most anything with a tinge of controversy until a new president takes office. Couple that with $4-a-gallon gasoline, the subprime lending mess and its consequent Wall Street earthquake, and there is plenty to distract Congress from trade.

At the same time, there is genuine debate among economists and trade experts about how to resolve the acknowledged problems with China. Some, for example, look at the Chinese economy with its increasing inflation, a strengthening yuan—however slowly—against the dollar and a deteriorating global public image, and say the Chinese themselves will soon realize it is in their best interests not to be seen as a trade outlaw. Most recently, The New York Times and others have attributed China’s steady slippage as low-cost producer of textiles and other consumer goods to competition from Vietnam and Indonesia, among others.

The administration and its allies worry, in any case, that imposing widespread countervailing duties against China would pose problems for the United States. As Christopher A. Padilla, under secretary of commerce for international trade with the U.S. Department of Commerce, wrote recently on the International Economy and Law blog: “China is the single largest supplier of inexpensive products purchased by American consumers. In this time of economic uncertainty, as Congress and the administration work together to stimulate growth, it would be very unwise to pass legislation that could inflate consumer prices.

“Inserting relative currency values into trade remedy cases could open a Pandora’s Box of never-ending trade retaliation. The United States is already the third largest victim of anti-dumping cases in the world. If we insert our own judgments on the value of foreign currencies into trade remedy cases, we would have to expect that similarly subjective countermeasures would be directed against our exports.”

That is the administration’s case, but it is also the argument used by some very powerful lobbies. In fact, the single most muscular barrier to China trade sanctions at the moment is the obdurate opposition of more than 140 of the United States’ most powerful businesses and trade associations, members of the United States-China Business Council Inc. (USCBC), a private, nonprofit organization of more than 250 American corporations that do business with China. In a letter to Rangel in February, these corporations, retailers and business trade groups—from Amway to Wal-Mart, from the American Petroleum Institute to the U.S. Chamber of Commerce—declared: “We are very concerned … that a number of pending legislative proposals, if enacted, would represent an abuse or violation of international rules and also run counter to our economic interests. One example is the imposition of countervailing or anti-dumping duties based on a unilateral currency policy analysis.

“Such measures would erode the very rules that support U.S. commercial success at home and abroad, including in China. In fact, the yuan has appreciated by more than 15% since 2005, and global and domestic factors in China today are increasingly aligned for further and more rapid appreciation of the yuan.”

They forgot to mention that imposing higher costs on China would also increase prices on lots of goods in all of their stores and likely have consumers screaming. At them, not China.

But when a mass of heavy campaign contributors like this talks, Congress listens. Certainly, the pro–sanction lobbyists are convinced that this outpouring from the Fortune 500 has brought things to a screeching halt. “This is all about K Street, [where the offices of major Washington lobbyists are located] and Wall Street,” says Rep. Michael Michaud (D-Maine), who heads the House Trade Working Group. “The large multinationals continue to run Congress. If nothing happens on this issue, there will be no one to blame but the Democrats who control Congress. Unfortunately, there has been no real difference on trade between the Republican- and Democrat-controlled Congress.”

More than that, trade can be “archaic and heavy stuff, which a lot of the members simply don’t understand,” says one senior staff member in Rep. Ryan’s office.

Hope Springs Eternal

Is there some way, any way, things might begin to move forward again? After the upcoming presidential election, in which the industrial Midwest could play a huge role, the loss of manufacturing jobs and talk about its link to trade could re-emerge. But that’s assuming the economy becomes more stable and that the next president also has a convincing policy to address gasoline and energy prices and supply. These issues, otherwise, promise to remain powerful distractions for a new administration and its Congress.

“China will eat the United States alive if we don’t change direction,” says Michaud. “Congressional leadership needs to get more engaged on this.” Michaud and more than 30 of his colleagues in the House wrote Speaker Nancy Pelosi in February, asking for a meeting to discuss trade and other economic issues, and perhaps break the logjam. At press time, Pelosi’s office had been unable to even find the letter, let alone comment on it.

Perhaps a better bet would be on the Dalai Lama and the deteriorating public opinion of China’s behavior. French President Nicholas Sarkozy has threatened to boycott the opening ceremonies if China does not open negotiations with the Dalai Lama. Already, British Prime Minister Gordon Brown and German Chancellor Angela Merkel have announced they will not attend the opening festivities. Groups such as Dream for Darfur have mounted a campaign against what they call the “Genocide Olympics,” asking Olympic athletes to speak out and sponsors to take a stand against China’s involvement with Sudan. Microsoft, a sponsor of the games, has already said it will support such organizations through technological assistance and other resources, and Steven Spielberg recently resigned as creative consultant for the opening ceremonies.

If those movements rock China and its Olympics, or produce even a partial boycott or withdrawal of sponsor support, public opinion and politicians’ reluctance to act against the country could change. Nike, Wal-Mart, Microsoft, even Caterpillar—all names on that letter to Rangel—might find it easier to disown China and favor sanctions against it. In which case, Ryan, Hunter, Dodd and Baucus might want to change the name on their legislation to “The Currency Reform and Trade Act in honor of the Dalai Lama and peace in Darfur.” Don’t hold your breath.